Is it a special situations fund or more of a traditional " long term franchise-style" investor? If so, I think that’s the reason you and Frank are disagreeing.
If you guys are a SS fund, did you by any chance invest in Huntington Ingalls? I stared at it for ages but somehow didn’t pull the trigger when it was trading at 1B…
i used 1 year cause that is the time i got a full portfolio to manage…
triple digit years are hard to come by from what i see…even when funds were small at Baupost, Fairfax, Chou Funds, Buffet partnership, Munger partnership etc i didn’t notice them having outsized returns in any given year like that (100%+) but i could be wrong…and i think they’re the floyd mayweathers of the investing game…
the guys who did do those numbers rode a huge wave (i.e. commodities n the recent decade) but subsequently had double digit losses…
just looking to step my game up…but i actually never invested in anything i thought would go up 3x in the intermediate term so maybe thats my problem…but when i look at stocks that tripled in value they were not stocks i would ever invests due to weak balance sheets or whatever…
what are your thoughts on? TEVA, JPM, GOOG, INTC…i don’t see them doing double in the 3 year horizon but i dont’ think they’ll lose money either…
I agree. I’m not sure what style of fund Frank has in mind. I’m referring to small cap long / short (or actually even into multi-strategy focusing on select distressed debt and other debt instruments). Capital base is $500 million or less. If by franchise-style you mean private market analysis then yes – it is sort of a cross between Gabelli and Greenblatt, private market with a catalyst & magic formula. I know several people who have spun out of this fund and done 30%+ over 5-10 year periods. The founder has done better than that over 15 years. The founder’s father has done better than that over a decade plus before he retired. It’s possible if you have a small capital base and are very opportunistic. It would not work at Greenlight, SAC, etc. Those firms are too big.
i’m not sure that even matters…money is money…hedge fund performance overall has been weak from what i read…i believe that group encompassess all types of strategy…Private Equity may be diffferent due to active involvement and lots of leverage but running a private equity operation is not something even an average portfolio manager can do
I have no thoughts on those Frank. I rarely look at anything over a billion in market cap and certainly not over five billion. If those are the kinds of stocks you look at then what we’re talking about is not comparable. I’m talking about names like AEPI that go from 22 to 48 in 10 months (likely on its way to 60+). That stock is probably too small for you.
I don’t think that is the case, in special situations, due to the huge embedded leverage built into these securities, you can see some spectacular returns, but those are not consistently found year to year. You’ve read the Greenblatt book right? I assume bromion’s firm is more like that.
If you’re primarily looking for firms that have growing annuity stream of cash flow with a MoS (what I call “franchise style”), I don’t think you’ll see epic 30+% returns, but they will still be very good, and more in line with what you’re saying, 20% return there would be excellent.
Yes, I think we are most similar to Gotham and maybe 2 or 3 other firms that I know of. I wouldn’t call it special situations per se, but there is definitely some exposure to distressed equity and other “leveraged” opportunities (although we don’t use leverage per se). A distressed equity name can go up 20x but it can also go to zero. I know that for a while Gotham was returning 50% a year compounded, although I think it is has declined somewhat as they have gotten larger.
A lot of the returns in these sort of funds come from getting involved in things that others can’t – here’s a stock under $5 that is a great deal. Here’s a spin out. Here’s some diamonds in the rough on Russell week. Here’s an orphaned IPO post-Lehman. Here’s a block trade that looks like a screamer over 3 years. Here’s a misunderstood small cap. The list goes on. But the point is, you are not blocking and tackling on blue chip names that have 30 analysts following them. If you want to call that special situations then so be it, although I am not really sure what special situations means. Is activism special situations? Is using derivatives? Is it a special situation if you own 20% of the stock? I don’t know.
I agree that 20% is excellent for other styles or larger firms. Clearly Frank and I are looking at two different things.
i manage funds the size of a traders lunch tab so its not size…i follow buffets rule in sticking to things understandable and possibility of losing money at close to nil…
if i may dig more, what makes you think AEPI will go to 60? what am i missing here (not saying you’re wrong, just want to see your thought process).
According to 2011 10k, the stock looks to be in a low margin industry with significant capex to cash flow generation with interest coverage of less than 3x (oper income adjsuted for amor/depreciation/stock expense).
Valuation looks to be high at 250m with relatively lumpy earnings (8x p/e on the best of last 5 years earnings and over 20x based on 2011) and book value of roughly 50m implies 5x book value…
Also, half of assets for this asset heavy industry is goodwill…i would consider this company to be debt heavy…
defintely not an expert or knowledgeable in this sector but things don’t jump out at me…please fill in…
I would have to dig through my notes to get the specific numbers, but this is the gist:
The company recently refi’d its debt, has a history of aggressively buying stock, and is run by two value guys with decades in the business who combined own a large chunk (it might be 20-30% off the top of my head but don’t quote me).
The business itself isn’t a stunner at first glance, but it has structurally embedded market share gains coming for the next 5 years. The industry is very fragmented with high fixed asset requirements, and many mom & pop one shop players are no longer earning their cost of capital post-Lehman (especially after getting whipsawed on resin prices due to the fluctuating price of oil). AEPI is the low cost producer. Because this is plastic films, it is never going away (every consumer product uses this stuff) and cannot be outsourced due to weight (shipping beyond 500 miles or something like that is prohibitive). The company has a national or near national foot print and is the second largest in the industry. They soak up share just by showing up to work every day, providing future operating leverage. The share gain opportunity is happening and will continue to happen for some time. It is not a “story.”
If you look at normalized gross profit per pound of $0.20+ and model in market share gains (500 million pounds, conservatively), it punches out in a spreadsheet to somewhere around 50-70 million of normalized FCF with a buy back. There are no aggressive assumptions in the model. It was a lay up at $22. It is leveraged, that’s true and they have suffered from margin compression just like everyone else, but they are in the cat bird seat (#2 of 350 with scale). The #1 player has a worse balance sheet (was an LBO) and cannot generate significant additional pricing pressure. Current pricing pressure is bound to alleviate at some point after the smaller players bleed out and die.
I went out to meet this company in New Jersey and management is true blue. The opportunity exists because they hate Wall Street – if you read the calls, there is obvious disdain for the analyst community, which is hyper-focused on what resin will do in the next 10 minutes. So management never bothered to outline the full extent of the share gain potential. I did some basic industry research and it was pretty clear cut. Anyway, my math said about $60, but it could go higher over time if they gain even more share. It happened faster than I expected.
I agree that the business is not sexy and without the market share back drop would not be a very attractive long. It’s a mistake to think that low margin businesses cannot be attractive investments though. In terms of debt heavy, I would have avoided except that they just got a refi and were aggressively buying stock with high insider ownership – if that is not a very positive sign, I don’t know what is.
By the way, the fund I work for bought some and I personally bought some at $22, so this is not theoretical.
good write up Bromion…
Yeah, I would just add one thing – the stocks I try to find are low multiple sleepy stocks that become multiple expanding growth stocks. Three ways to get “paid” as an investor – dividends, earnings growth with constant multiples, and expanding multiples. If you can find something with sustainably growing earnings at a low multiple, that’s probably going to be a big win over time. Stuff like “Tech IPO 2.0” with high earnings growth automatically gets a high multiple applied to it, and that is actually quite risky if the growth decelerates. So I try to go in reverse – what is this thing that has done okay or subpar over time but with decent structurally embedded characteristics, and is it going to improve?
They are hard to find. You have to turn over a lot of rocks. I’ve heard it said that in a normalized stock market, maybe 9 / 10 stocks are fairly priced within a decent range. If that’s true, then maybe 1,000 of the 10,000 stocks are actionable, split between longs and shorts. I personally am not good enough to find 1 in 10, and it seems to be more like 1 in 20 (and that’s assuming I’m right all the time, which is a stretch). So I try to go through things pretty quickly (days or less, not weeks).
Okay, seriously, I need to do some work today.
Stay away from JPM. Their troubles are just beginning. Remember I warned you…
Frank, we still have our TEVA vs AAPL earnings bet. So far I’m winning.
fascinating writeup. I wouldn’t have looked at that stock twice…
is there any rationale behind your JPM hypothesis? do you know something about their trading losses i don’t?
you will be up on me for at least 1 year on the AAPL…TEVA is in the penalty box for the time being given new CEO’s earnings miss and copaxone overhang…also Europe…but i’m still liking the bet…
That knowledge is readily available to everyone and while I understand your point about sum-of-parts analysis, I also think there’s a limitation because you need some type of liquidity event to make that happen anyway and oftentimes that weakens the usefulness of that type of analysis. Also, just how far does L deviate from NAV? It would stand to reason that the discount would need to be fairly significant to consider it “good value” unless there are other things you like about the company.
Anyway, I’m just trying to understand how you think about this, it’s not a company that I typically look at but am always interested in hearing different people’s viewpoints on investing.
I don’t know what you mean by liquidity event…but a share buyback would be quite enough to unlock the value. Even though L is trading at a 20% discount to NAV (which itself may underestimate intrinsic value), NAV has grown at about 11% over the past ten years, so there are really three “layers” of expected returns:
NAV growth continues at a high rate
Price returns to NAV
NAV increases to reflect intrinsic value.
Even if Price does not reflect NAV, the growth in BV itself should be enough to drive returns.
Yes and yes. Though the trading losses aren’t from the CIO group…different matter altogether and potentially much worse. I’d fish elsewhere for now.
i highly doubt you have any information that can damage a 100billion dollar company that the general public doesn’t already know…stop reading the tealeaves…
i looked into GLW but had reasons to hold out…looking into DELL but at this moment i sense they have much more downside…but will keep investigating…
Give it 3-6 months. All publically available info. It’s not a sure thing, but enough that I wouldn’t go near JPM.